John Caspar

Wow. That was quite a 2008. If you used to be a regular reader of this column you'll have noted that while the economic world was falling apart, I was missing from this space. As it turns out, I was having a rather poor end to 2008 too.

You may recall that 2008 started off pretty well in the markets. It did for me as well. In May, I had a lovely motorcycle ride through the Alps with several good buddies as my "stag" before my wedding in June. In June, I married the amazing Miss Sienna. And then, shortly after I got back from my honeymoon and got my lovely bride and her two boys moved into our marital home, I had a bad doctor's visit. Cancer. Stage four.

"You look discouraged", I said to my doctor, as he read the biopsy results.

"I am", he said flatly.

Now, I'm in my forties, and the docs tell me that I have no risk factors for disease. Any disease. There's no family history, and no lifestyle factors. I don't drink or smoke. I exercise an hour a day. I eat deliberately. I'm happy, fulfilled and empowered. But every now and then it's good to get reminded that you can't control everything. So the late summer of 2008 brought the discovery that a fatal disease had randomly found me, and had made good progress before it announced itself.

The flat out, scorched earth war that is modern cancer treatment doesn't lend itself to much else besides trying to survive, so everything else stopped for me. No calls, no clients, no writing. And, fortunately for the most part, no remembering. I'm back now, returning to my post, recovering and hopeful. This quiet space will once again be regularly filled by me, and I hope for a long time. Happy New Year indeed!

That's my 2008 story. I mention it partly by way of explaining my long absence from this space - and partly because it happens to be an irresistible metaphor for what's happened in the financial markets over the very same time period. The world's largest economy - the U.S. - is seriously ill, and that illness has spread to other economies the world over. Left unchecked, it will be completely destructive. But treatment, while essential, is itself nasty and unpalatable. And recovery will not be quick.

To be sure, you'll read opinions about how the markets - and particularly the stock markets - will have all this unpleasantness behind them by the second quarter of 2009, as the balms of low interest rates, government bailouts and spending, and increased money supply bolster confidence and lube the wheels of commerce. The stock market, after all, is a leading indicator, and it will soon look ahead to the good news that will eventually come with the inevitable turning of the economic tide. Today's scary stock market is home to bargain prices that tomorrow's investors will wish they had paid.

But hold that thought. There are also other pundits who point out that the U.S. is going through an unprecedented period of turmoil. Economic activity in the U.S. is falling off a cliff, they say, and is more indicative of a dangerous depression than a merely inconvenient recession. This time, the bears say, it's serious. Spending will stop as jobless numbers rise. Corporate earnings will fall, and stock prices along with them. The contraction will be widespread, and it won't sort itself out in a quarter or two. Sure, stock prices are reasonably compelling now, this school of thought says, but just wait. In a depression, they get cheap. It's not time to buy, they say. It's time to survive.

So there are the two sides of the argument for how to think about the markets as we head into 2009. One side says that it's time to wade back in, and take advantage of the opportunity in low stock prices over the next few months, and the other side says that you ain't seen nothin' yet, and there's lots more pain to come.

Who's right?

Well, if there's anything that 2008 made clear, it's that nobody knows the future, and even smart people with well-reasoned arguments can be absolutely wrong in either the outcome or the timing. And that means that investors need to develop their investment policy based on risk analysis and their own tolerance for risk. In other words, you'll have to decide about the costs and opportunities inherent in following one theme or another. As both an investor and a financial advisor, though, it's my experience that the losing hurts more than the winning feels good. And in this most uncertain of times, that argues for a little prudent pessimism. When you're sick - really sick - it takes a long time to recover, even if the treatment works. Your plans need to reflect that.

Next week we'll talk about what prudent pessimism might look like in your financial plan. In the meantime, best wishes for a very Happy New Year from my house to your house!

© 2009 John Caspar